Consumer Law

The Fannie Freddie Fable

By Alan White

At last night's debate, Senator McCain trotted out the discredited fiction that Fannie Mae and Freddie Mac were the root cause of the foreclosure crisis, and that they started the practice of making reckless loans to homeowners who couldn't repay them. Senator Obama correctly shifted the emphasis to deregulation, but did not set Senator McCain straight on the facts, seeming hesitant to defend Fannie and Freddie.

The fact is that subprime lending caused the crisis, and subprime loans were, by definition, loans that Fannie and Freddie (the GSEs) would NOT purchase. Let's say that again. A subprime loan was a loan that was not eligible for purchase by the GSEs, also known as a "nonconforming" loan. A mortgage was ineligible for GSE purchase for one of two reasons: either the amount exceeded the GSE ceiling of about $350,000, or the underwriting was too lax to meet GSE standards. Subprime loans were sold to investors through so-called private label securitizations, which means a securitization that was NOT sponsored by Fannie or Freddie. So, for example, Aurora Loan Services, an unregulated nondepository lender, made no-doc loans interest-only loans and sold them to investors through a Lehman Brothers securitization. The subprime lending and securitization machine was pumping out toxic mortgages for years before Freddie, and to a lesser extent Fannie, started purchasing the subprime securities to boost their profits. At worse, the GSEs, along with every bank, insurance company and institutional investor in the world, acted as enablers for the subprime lending boom to continue, and were victims, not catalysts of the crisis.

Full post as published by CL&P Blog on October 08, 2008 (boomark / email).